UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from to
------ --------
Commission file number 1-3382
CAROLINA POWER & LIGHT COMPANY
------------------------------
(Exact name of registrant as specified in its charter)
North Carolina
--------------
(State or other jurisdiction of incorporation or
organization)
56-0165465
----------
(I.R.S. Employer Identification No.)
411 Fayetteville Street, Raleigh, North Carolina 27601-1748
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
919-546-6111
------------
(Registrant's telephone number, including area code)
NONE
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock (Without Par
Value) shares outstanding at October 31, 1998: 151,330,894.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
------------------------------------------
The matters discussed throughout this Form 10-Q that are not historical
facts are forward-looking and, accordingly, involve estimates,
projections, goals, forecasts, assumptions and uncertainties that could
cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements.
Examples of forward-looking statements discussed in this Form 10-Q,
PART 1, ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", include, but are not limited to,
statements under the heading "Other Matters" concerning the effects of
deregulation and the outcome of the Company's Year 2000 Project.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made.
Examples of factors that should be considered with respect to any
forward-looking statements made throughout this document include, but
are not limited to, the following: Governmental policies and regulatory
actions (including those of the Federal Energy Regulatory Commission,
the Environmental Protection Agency, the Nuclear Regulatory Commission,
the Department of Energy, the North Carolina Utilities Commission and
the South Carolina Public Service Commission); general industry trends;
operation of nuclear power facilities; nuclear storage facilities;
nuclear decommissioning costs; general economic growth; weather
conditions and catastrophic weather-related damage; deregulation;
market demand for energy; inflation; capital market conditions;
unanticipated changes in operating expenses and capital expenditures
and legal and administrative proceedings. All such factors are
difficult to predict, contain uncertainties that may materially affect
actual results, and may be beyond the control of the Company. New
factors emerge from time to time and it is not possible for management
to predict all of such factors, nor can it assess the effect of each
such factor on the Company.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------------------------------------------------------------------------------------------------------
Carolina Power & Light Company
(ORGANIZED UNDER THE LAWS OF NORTH CAROLINA)
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
----------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
(In thousands except per share amounts) 1998 1997 1998 1997 1998 1997
--------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 946,188 $ 906,841 $2,434,635 $2,288,948 $ 3,169,776 $ 2,983,519
--------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel 162,925 145,524 442,630 397,774 579,125 521,165
Purchased power 113,323 120,242 301,375 294,406 394,265 386,662
Other operation and maintenance 144,033 152,801 466,433 494,610 633,290 685,864
Depreciation and amortization 121,377 119,590 366,987 358,590 490,046 465,348
Taxes other than on income 39,798 36,761 109,249 105,286 143,441 135,744
Income tax expense 128,789 115,213 256,621 198,078 311,591 241,452
Harris Plant deferred costs, net 1,644 5,429 5,451 19,173 10,573 25,687
--------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 711,889 695,560 1,948,746 1,867,917 2,562,331 2,461,922
--------------------------------------------------------------------------------------------------------------------------
Operating Income 234,299 211,281 485,889 421,031 607,445 521,597
--------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Allowance for equity funds used during 4 2 11 118 (108) (2,097)
construction
Income tax benefit 7,361 4,789 29,574 9,914 38,992 9,443
Harris Plant carrying costs 940 1,107 2,860 3,610 3,876 5,021
Interest income 1,536 3,227 6,010 15,412 8,933 16,610
Other, net (14,737) (6,695) (53,649) (11,173) (61,751) 11,795
--------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (4,896) 2,430 (15,194) 17,881 (10,058) 40,772
--------------------------------------------------------------------------------------------------------------------------
Income Before Interest Charges 229,403 213,711 470,695 438,912 597,387 562,369
--------------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 42,437 40,630 129,257 121,778 170,947 163,962
Other interest charges 3,050 6,191 8,380 16,508 10,614 19,925
Allowance for borrowed funds used during (2,108) (939) (5,006) (3,754) (6,174) (7,014)
construction
--------------------------------------------------------------------------------------------------------------------------
Net Interest Charges 43,379 45,882 132,631 134,532 175,387 176,873
--------------------------------------------------------------------------------------------------------------------------
Net Income 186,024 167,829 338,064 304,380 422,000 385,496
Preferred Stock Dividend Requirements (742) (2,167) (2,225) (5,310) (2,966) (7,713)
--------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 185,282 $ 165,662 $ 335,839 $ 299,070 $ 419,034 $ 377,783
--------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 144,001 143,800 143,887 143,591 143,866 143,522
Basic Earnings per Common Share $ 1.29 $ 1.15 $ 2.33 $ 2.08 $ 2.91 $ 2.63
Diluted Earnings per Common Share (Note 5) $ 1.28 $ 1.15 $ 2.33 $ 2.08 $ 2.91 $ 2.63
Dividends Declared per Common Share $ 0.485 $ 0.470 $ 1.455 $ 1.410 $ 1.940 $ 1.880
--------------------------------------------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company
BALANCE SHEETS
September 30 December 31
(In thousands) 1998 1997 1997
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
Electric Utility Plant
Electric utility plant in service $ 10,238,675 $ 10,039,131 $ 10,113,334
Accumulated depreciation (4,436,187) (4,057,913) (4,181,417)
-----------------------------------------------------------------------------------------------------------------------------
Electric utility plant in service, net 5,802,488 5,981,218 5,931,917
Held for future use 11,886 12,734 12,255
Construction work in progress 255,005 155,098 158,347
Nuclear fuel, net of amortization 205,881 184,643 190,991
-----------------------------------------------------------------------------------------------------------------------------
Total Electric Utility Plant, Net 6,275,260 6,333,693 6,293,510
-----------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 24,571 14,736 14,426
Accounts receivable 498,632 396,167 406,872
Fuel 61,311 46,715 47,551
Materials and supplies 140,254 130,604 136,253
Deferred fuel cost 42,240 11,260 20,630
Prepayments 58,269 59,273 62,040
Other current assets 17,691 43,271 47,034
-----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 842,968 702,026 734,806
-----------------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 290,278 342,976 328,818
Abandonment costs 19,531 45,461 38,557
Harris Plant deferred costs 61,134 67,834 63,727
Unamortized debt expense 32,348 53,767 48,407
Nuclear decommissioning trust funds 298,280 179,682 245,523
Miscellaneous other property and investments 269,636 213,638 256,291
Other assets and deferred debits 272,497 215,030 211,089
-----------------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,243,704 1,118,388 1,192,412
-----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 8,361,932 $ 8,154,107 $ 8,220,728
-----------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity $ 2,957,164 $ 2,805,515 $ 2,818,807
Preferred stock - redemption not required 59,376 59,376 59,376
Long-term debt, net 2,535,409 2,389,251 2,415,656
-----------------------------------------------------------------------------------------------------------------------------
Total Capitalization 5,551,949 5,254,142 5,293,839
-----------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 73,172 188,529 207,979
Accounts payable 224,491 160,344 290,352
Taxes accrued 124,659 134,257 13,666
Interest accrued 29,360 33,810 43,620
Dividends declared 72,206 69,901 72,266
Other current liabilities 106,237 96,950 102,943
-----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 630,125 683,791 730,826
-----------------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,671,677 1,743,092 1,722,908
Accumulated deferred investment tax credits 214,374 224,587 222,028
Other liabilities and deferred credits 293,807 248,495 251,127
-----------------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,179,858 2,216,174 2,196,063
-----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 2, 3 and 4)
Total Capitalization and Liabilities $ 8,361,932 $ 8,154,107 $ 8,220,728
-----------------------------------------------------------------------------------------------------------------------------
SCHEDULES OF COMMON STOCK EQUITY
(In thousands)
Common stock $ 1,372,267 $ 1,371,520 $ 1,371,520
Unearned ESOP common stock (154,356) (165,805) (165,804)
Capital stock issuance expense (790) (790) (790)
Retained earnings 1,740,043 1,600,590 1,613,881
-----------------------------------------------------------------------------------------------------------------------------
Total Common Stock Equity $ 2,957,164 $ 2,805,515 $ 2,818,807
-----------------------------------------------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company
STATEMENTS OF CASH FLOWS
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
(In thousands) 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 186,024 $ 167,829 $ 338,064 $ 304,380 $ 422,000 $ 385,496
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 145,655 141,085 435,702 420,038 580,876 524,187
Harris Plant deferred costs 704 4,322 2,591 15,563 6,697 20,666
Deferred income taxes (8,193) (16,507) (44,795) (57,788) (53,551) 54,788
Investment tax credit (2,551) (2,558) (7,654) (7,675) (10,213) (10,286)
Deferred fuel cost (credit) (16,326) (16,362) (21,610) (15,599) (30,980) (20,014)
Net(increase)decrease in receivables,
inventories and prepaid expenses 11,216 (50,849) (129,176) (86,366) (154,026) (133,007)
Net increase (decrease)in payables and accrued
expenses 29,217 104,574 123,228 37,510 79,304 (72,003)
Miscellaneous 40,631 30,128 37,584 49,914 46,863 37,272
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 386,377 361,662 733,934 659,977 886,970 787,099
- ------------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (124,512) (87,332) (296,310) (227,458) (391,057) (346,786)
Nuclear fuel additions (24,796) (16,474) (96,079) (50,278) (107,310) (72,940)
Contributions to external decommissioning trust (7,720) (7,556) (25,659) (25,577) (30,808) (30,725)
Contributions to retiree benefit trusts - - - (21,096) - (21,096)
Net cash flow of company-owned life insurance program 119 179 (2,405) 137,708 (1,605) 137,688
Miscellaneous (32,899) (14,174) (72,954) (35,026) (92,661) (41,802)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (189,808) (125,357) (493,407) (221,727) (623,441) (375,661)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 2,789 199,075 3,790 199,075 3,790 199,075
Net increase (decrease) in short-term debt
(maturity less than 90 days) - (93,900) - (62,224) - (74,722)
Net increase (decrease) in commercial paper classified
as long-term debt 2,000 (189,600) 166,400 (189,600) 251,900 (115,857)
Retirement of long-term debt (146,513) (1,420) (187,989) (62,847) (228,552) (32,569)
Redemption of preferred stock - (85,850) - (85,850) - (85,850)
Purchase of Company common stock - - - (23,418) - (27,558)
Dividends paid on common and preferred stock (70,620) (70,260) (211,960) (209,591) (280,209) (277,241)
Miscellaneous 10 - (623) - (623) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (212,334) (241,955) (230,382) (434,455) (253,694) (414,722)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (15,765) (5,650) 10,145 3,795 9,835 (3,284)
Cash and Cash Equivalents at Beginning of the Period 40,336 20,386 14,426 10,941 14,736 18,020
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 24,571 $ 14,736 $ 24,571 $ 14,736 $ 24,571 $ 14,736
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 57,868 $ 48,616 $ 148,995 $ 138,653 $ 181,853 $ 178,344
income taxes $ 67,232 $ 36,599 $ 194,026 $ 133,893 $ 349,826 $ 226,493
Noncash Activities
In June 1997, Strategic Resource Solutions Corp., a wholly-owned subsidiary,
purchased all remaining shares of Knowledge Builders, Inc. (KBI). In connection
with the purchase of KBI, the Company issued $20.5 million in common stock and
paid $1.9 million in cash.
- ------------------------------------------------------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company
SUPPLEMENTAL DATA
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands)
Residential $ 341,459 $ 310,251 $ 821,272 $ 750,113 $1,057,995 $ 974,134
Commercial 205,188 193,713 526,417 493,684 681,173 643,087
Industrial 202,709 206,230 555,126 561,735 731,476 740,723
Government and municipal 22,673 21,766 60,546 58,667 79,028 76,382
Power Agency contract requirements 34,933 28,672 77,748 57,418 91,648 75,238
NCEMC 69,931 68,666 174,895 169,365 231,480 214,447
Other wholesale 25,964 23,041 70,938 67,301 95,722 91,672
Other utilities 27,364 40,314 104,153 89,158 144,080 111,629
Miscellaneous revenue 15,967 14,188 43,540 41,507 57,174 56,207
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 946,188 $ 906,841 $2,434,635 $ 2,288,948 $3,169,776 $ 2,983,519
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Sales (millions of kWh)
Residential 4,074 3,697 10,380 9,416 13,451 12,290
Commercial 3,189 2,984 8,187 7,612 10,585 9,889
Industrial 3,843 3,953 11,226 11,345 14,954 15,027
Government and municipal 405 379 1,037 989 1,343 1,274
Power Agency contract requirements 791 779 1,792 1,619 2,245 2,064
NCEMC 1,504 1,359 3,489 3,131 4,532 4,004
Other wholesale 538 484 1,594 1,531 2,184 2,097
Other utilities 1,106 1,339 4,381 3,524 6,390 4,632
- ------------------------------------------------------------------------------------------------------------------------------------
Total Energy Sales 15,450 14,974 42,086 39,167 55,684 51,277
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Supply (millions of kWh)
Generated - coal 7,889 7,424 21,454 18,683 28,317 24,517
nuclear 5,865 5,491 16,523 16,106 22,107 21,100
hydro 73 105 714 677 836 886
combustion turbines 212 95 371 145 416 156
Purchased 1,907 2,251 4,478 4,832 5,965 6,418
- ------------------------------------------------------------------------------------------------------------------------------------
Total Energy Supply (Company Share) 15,946 15,366 43,540 40,443 57,641 53,077
- ------------------------------------------------------------------------------------------------------------------------------------
Detail of Income Taxes (in thousands)
Included in Operating Expenses
Income tax expense (credit) - current $ 139,849 $ 134,217 $ 308,763 $ 264,040 $ 376,603 $ 206,756
deferred (8,509) (16,446) (44,488) (58,287) (54,799) 44,982
investment tax
credit adjustments (2,551) (2,558) (7,654) (7,675) (10,213) (10,286)
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 128,789 115,213 256,621 198,078 311,591 241,452
- ------------------------------------------------------------------------------------------------------------------------------------
Harris Plant deferred costs - investment tax
credit adjustments - (30) - (130) (21) (193)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Included in Operating Expenses 128,789 115,183 256,621 197,948 311,570 241,259
- ------------------------------------------------------------------------------------------------------------------------------------
Included in Other Income
Income tax expense (credit) - current (7,677) (4,728) (29,267) (10,413) (40,240) (19,249)
deferred 316 (61) (307) 499 1,248 9,806
- ------------------------------------------------------------------------------------------------------------------------------------
Total Included in Other Income (7,361) (4,789) (29,574) (9,914) (38,992) (9,443)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 121,428 $ 110,394 $ 227,047 $ 188,034 $ 272,578 $ 231,816
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Ratio of earnings to fixed charges 4.57 4.11
Return on average common stock equity 14.63 % 13.79 %
Book value per common share $ 20.55 $ 19.51
Capitalization ratios
Common stock equity 53.26 % 53.40 %
Preferred stock - redemption not required 1.07 1.13
Long-term debt, net 45.67 45.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total 100.00 % 100.00 %
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
A. Organization. Carolina Power & Light Company (the Company) is
a public service corporation primarily engaged in the
generation, transmission, distribution and sale of electricity
in portions of North and South Carolina. The Company has no
other material segments of business.
B. Basis of Presentation. These consolidated interim financial
statements should be read in conjunction with the Company's
consolidated financial statements included in the Company's
1997 Annual Report on Form 10-K. The amounts are unaudited
but, in the opinion of management, reflect all adjustments
necessary to fairly present the Company's financial position
and results of operations for the interim periods. Due to
temperature variations between seasons of the year and the
timing of outages of electric generating units, especially
nuclear-fueled units, the results of operations for interim
periods are not necessarily indicative of amounts expected for
the entire year. Certain amounts for 1997 have been
reclassified to conform to the 1998 presentation, with no
effect on previously reported net income or common stock
equity.
In preparing financial statements that conform with generally
accepted accounting principles, management must make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements and amounts of
revenues and expenses reflected during the reporting period.
Actual results could differ from those estimates.
2. NUCLEAR DECOMMISSIONING
In the Company's retail jurisdictions, provisions for nuclear
decommissioning costs are approved by the North Carolina Utilities
Commission (NCUC) and the South Carolina Public Service Commission and
are based on site-specific estimates that include the costs for removal
of all radioactive and other structures at the site. In the wholesale
jurisdiction, the provisions for nuclear decommissioning costs are
based on amounts agreed upon in applicable rate agreements. Based on
the site-specific estimates discussed below, and using an assumed
after-tax earnings rate of 8.5% and an assumed cost escalation rate of
4%, current levels of rate recovery for nuclear decommissioning costs
are adequate to provide for decommissioning of the Company's nuclear
facilities.
The Company's most recent site-specific estimates of decommissioning
costs were developed in 1993, using 1993 cost factors, and are based on
prompt dismantlement decommissioning, which reflects the cost of
removal of all radioactive and other structures currently at the site,
with such removal occurring shortly after operating license expiration.
These estimates, in 1993 dollars, are $258 million for Robinson Unit
No. 2, $235 million for Brunswick Unit No. 1, $221 million for
Brunswick Unit No. 2 and $284 million for the Harris Plant. The
estimates are subject to change based on a variety of factors
including, but not limited to, cost escalation, changes in technology
applicable to nuclear decommissioning and changes in federal, state or
local regulations. The cost estimates exclude the portion attributable
to North Carolina Eastern Municipal Power Agency, which holds an
undivided ownership interest in the Brunswick and Harris nuclear
generating facilities. Operating licenses for the Company's nuclear
units expire in the year 2010 for Robinson Unit No. 2, 2016 for
Brunswick Unit No. 1, 2014 for Brunswick Unit No. 2 and 2026 for the
Harris Plant.
The Financial Accounting Standards Board has reached several tentative
conclusions with respect to its project regarding accounting practices
related to obligations associated with the retirement of long-lived
assets (formerly referred to as liabilities for closure and removal of
long-lived assets). It is uncertain when the final statement will be
issued and what effects it may ultimately have on the Company's
accounting for nuclear decommissioning and other retirement costs.
3. RETAIL RATE MATTERS
A petition was filed in July 1996 by the Carolina Industrial Group for
Fair Utility Rates (CIGFUR) with the NCUC, requesting that the NCUC
conduct an investigation of the Company's base rates or treat its
petition as a complaint against the Company. The petition alleged that
the Company's return on equity (which was authorized by the NCUC in the
Company's last general rate proceeding in 1988) and earnings are too
high. In December 1996, the NCUC issued an order denying CIGFUR's
petition and stating that it tentatively found no reasonable grounds to
proceed with CIGFUR's petition as a complaint. In January 1997, CIGFUR
filed its Comments and Motion for Reconsideration, to which the Company
responded. In February 1997, the NCUC issued an order denying CIGFUR's
Motion for Reconsideration. CIGFUR filed a Notice of Appeal of the NCUC
Order with the North Carolina Court of Appeals. The Company filed its
brief in this matter in July 1997, and oral argument was held before
the North Carolina Court of Appeals (Court of Appeals) in November
1997. On September 1, 1998 the Court of Appeals filed its decision
affirming the NCUC Orders dismissing CIGFUR's petition. On September 6,
1998 CIGFUR filed a petition for Discretionary Review with the North
Carolina Supreme Court (Supreme Court) asking the Supreme Court to
review the Court of Appeals decision. The Company cannot predict the
outcome of this matter.
4. COMMITMENTS AND CONTINGENCIES
Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 1997,
with respect to the commitments discussed in Note 11 of the financial
statements included in the Company's 1997 Annual Report on Form 10-K.
A. Applicability of SFAS-71. As a regulated entity, the Company
is subject to the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" (SFAS-71). Accordingly, the
Company records certain assets and liabilities resulting from
the effects of the ratemaking process, which would not be
recorded under generally accepted accounting principles for
unregulated entities. The Company's ability to continue to
meet the criteria for application of SFAS-71 may be affected
in the future by competitive forces, deregulation and
restructuring in the electric utility industry. In the event
that SFAS-71 no longer applied to a separable portion of the
Company's operations, related regulatory assets and
liabilities would be eliminated unless an appropriate
regulatory recovery mechanism is provided. Additionally, these
factors could result in an impairment of electric utility
plant assets as determined pursuant to Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." At September 30, 1998, the Company's regulatory assets
totaled $464 million.
B. Claims and Uncertainties. 1) The Company is subject to
federal, state and local regulations addressing air and water
quality, hazardous and solid waste management and other
environmental matters.
Various organic materials associated with the production of
manufactured gas, generally referred to as coal tar, are
regulated under various federal and state laws. There are
several manufactured gas plant (MGP) sites to which the
Company and certain entities that were later merged into the
Company had some connection. In this regard, the Company,
along with others, is participating in a cooperative effort
with the North Carolina Department of Environment and Natural
Resources, Division of Waste Management (DWM), which has
established a uniform framework to address MGP sites. The
investigation and remediation of specific MGP sites will be
addressed pursuant to one or more Administrative Orders on
Consent (AOC) between the DWM and the potentially responsible
party or parties. The Company has signed AOC's to investigate
certain sites. The Company continues to investigate the
identities of parties connected to individual MGP sites, the
relative relationships of the Company and other parties to
those sites and the degree to which the Company will undertake
efforts with others at individual sites. The Company does not
expect these costs to be material to the financial position
and results of operations of the Company.
The Company has been notified by regulators of its involvement
or potential involvement in several sites, other than MGP
sites, that may require remedial action. The Company cannot
predict the outcome of these matters.
The Company carries a liability, in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for
Contingencies", for the estimated costs associated with
certain remedial activities. This liability is not material to
the financial position of the Company.
2) As required under the Nuclear Waste Policy Act of 1982, the
Company entered into a contract with the U.S. Department of
Energy (DOE) under which the DOE agreed to dispose of the
Company's spent nuclear fuel by January 31, 1998. The DOE
defaulted on its January 31, 1998, obligation to begin taking
spent nuclear fuel, and a group of utilities, including the
Company, has undertaken measures to force the DOE to take
spent nuclear fuel and/or to pay damages. To date, the courts
have rejected attempts to force DOE to take spent nuclear
fuel. The Company cannot predict the outcome of this matter.
With certain modifications, the Company's spent fuel storage
facilities will be sufficient to provide storage space for
spent fuel generated on the Company's system through the
expiration of the current operating licenses for all of the
Company's nuclear generating units. Subsequent to the
expiration of these licenses, dry storage may be necessary.
3) On October 27, 1998, the Environmental Protection Agency
(EPA) published a final rule addressing the issue of regional
transport of ozone. This rule is commonly known as the NOx SIP
call. The rule requires utilities to make reductions in
nitrogen oxides (NOx) in 22 states, including North and South
Carolina, by May 2003. The Company is evaluating necessary
measures to comply with the rule. The Company is also
participating in litigation challenging the NOx SIP call. The
Company cannot predict the outcome of this matter.
4) In the opinion of management, liabilities, if any, arising
under other pending claims would not have a material effect on
the financial position and results of operations of the
Company.
5. EARNINGS PER COMMON SHARE
Restricted stock awards and contingently issuable shares had a dilutive
effect on earnings per share and increased the weighted-average number
of common shares outstanding for dilutive purposes by 274,825, 248,026
and 189,819 for the three, nine and twelve months ended September 30,
1998, respectively, and by 20,672 for the three, nine and twelve months
ended September 30, 1997. The weighted-average number of common shares
outstanding for dilutive purposes was 144.3 million, 144.1 million, and
144.1 million, for the three, nine and twelve months ended September
30, 1998, respectively, and 143.8 million, 143.6 million and 143.5
million, for the three, nine and twelve months ended September 30,
1997, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
For the Three, Nine and Twelve Months Ended September 30, 1998,
As Compared With the Corresponding Periods One Year Earlier
Operating Revenues
For the three, nine and twelve months ended September 30, 1998,
operating revenues were affected by the following factors (in
millions):
Three Months Nine Months Twelve Months
Weather $ 29 $ 81 $ 110
Customer growth/changes in usage patterns 23 54 60
Sales to other utilities (13) 15 33
Price (8) (26) (34)
Sales to Power Agency 6 20 16
Other 2 2 1
--- --- ---
Total $ 39 $ 146 $ 186
=== === ===
The increase in the weather component of revenue for all periods is the
result of more favorable temperatures in the current periods as
compared to prior periods. The increase in the customer growth/changes
in usage patterns component of revenue for all comparison periods
reflects continued growth in the number of customers served by the
Company, partially offset by the effect of lost revenues caused by
Hurricane Bonnie in the current periods. While residential and
commercial sales increased for all periods, industrial sales have
decreased slightly primarily reflecting downturns in the chemical and
textile industries. Sales to other utilities increased for the nine-
and twelve-month periods as a result of the Company's active pursuit of
opportunities in the wholesale power market. During the three-month
period, however, sales to other utilities have declined due to the
recent volatility of the wholesale market in comparison to that of the
prior period. The price-related decrease for the three months and nine
months ended September 30, 1998, is primarily attributable to a
decrease in the fuel cost component of revenue. The price-related
decrease for the twelve months ended September 30, 1998, is due to a
combination of a decrease in the fuel cost component of revenue and
changes to the Power Coordination Agreement, which were effective
January 1, 1997, between the Company and North Carolina Electric
Membership Corporation (NCEMC). The increase in revenue related to
sales to the North Carolina Eastern Municipal Power Agency (Power
Agency) for all periods is primarily due to more favorable temperatures
in the current periods, in addition to the timing of supplemental
capacity adjustments.
Operating Expenses
Fuel expense increased for all periods primarily due to an increase in
generation of approximately 7.1%, 9.7% and 10.8% for the three, nine
and twelve months ended September 30, 1998, respectively. The increase
in fuel expense for the nine- and twelve-month periods is also related
to a change in the generation mix. These increases were partially
offset by a decrease in fuel prices during the nine- and twelve-month
periods.
Other operation and maintenance expense decreased during the three and
nine months ended September 30, 1998, due to the timing of plant
outages and continued cost reduction efforts, which more than offset
expenses of approximately $10.4 million incurred in the current periods
related to Hurricane Bonnie. In the prior twelve-month period, other
operation and maintenance expense was reduced by the reversal of
approximately $30 million of Hurricane Fran expenses. These expenses
were incurred during the third quarter of 1996 and were reversed during
the fourth quarter of 1996 when the Company received regulatory
approval to defer and amortize expenses related to Hurricane Fran.
Excluding this reversal, other operation and maintenance expense
decreased approximately $82 million for the twelve-month period. This
decrease primarily reflects lower expenses resulting from the Company's
cost reduction efforts and a reduction in expenses related to plant
outages.
Depreciation and amortization increased approximately $25 million for
the twelve months ended September 30, 1998, of which approximately $17
million was a result of the accelerated amortization of certain
regulatory assets in accordance with orders from the commissions in the
Company's retail jurisdictions.
Income tax expense increased for all comparison periods primarily due
to an increase in pretax operating income. In addition, the increase
for the nine- and twelve-month periods reflects tax provision
adjustments recorded for potential audit issues in open tax years which
decreased income tax expense in the prior periods.
Harris Plant deferred costs, net decreased for all comparison periods
primarily due to the completion, in late 1997, of the amortization of
the Harris Plant phase-in costs related to the North Carolina retail
jurisdiction.
Other Income
The income tax benefit related to other income increased for all
comparison periods primarily as a result of a decrease in other income.
Interest income decreased for all comparison periods primarily as a
result of a decrease in tax refund-related interest income recognized
in the current periods.
Approximately $6 million, $30 million, and $37 million of the decrease
in other, net for the three-, nine- and twelve-month periods,
respectively, is due to the combined pre-tax start-up losses of two of
the Company's subsidiaries, Strategic Resource Solutions Corp. (SRS)
and Interpath Communications, Inc. (Interpath). Management has
projected losses for these subsidiaries as they evolve through start-up
phases; however, 1998 losses for SRS have been higher than management's
expectations. Accordingly, the Company has initiated cost-cutting and
revenue enhancing efforts at SRS to mitigate the effects of these
losses. Although not significantly affecting period-to-period
comparisons, Interpath's results for all reported periods include
losses recorded from its 10% limited partnership interest in BellSouth
Carolinas PCS, LP (a wireless communications technology company). The
decrease in the twelve-month period was also due to an adjustment of
$23 million to the unamortized balance of abandonment costs related to
the Harris Plant, which positively affected other, net in the prior
period.
Interest Charges
Interest charges relating to long-term debt increased for all
comparison periods due to an increase in commercial paper borrowings
classified as long-term debt in the current periods. For the nine and
twelve months ended September 30, 1998, the increase was also due to
the issuance of $200 million principal amount of first mortgage bonds
in August, 1997. Other interest charges decreased for all reported
periods primarily as a result of a decrease in commercial paper
borrowings classified as short-term debt.
Preferred Stock Dividend Requirements
The decrease in the preferred stock dividend requirements for all
comparison periods is the result of the redemption of two preferred
stock series in July 1997.
MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
For the Nine and Twelve months ended September 30, 1998
Cash Flow and Financing
The proceeds from commercial paper borrowings and/or internally
generated funds financed the redemption or retirement of long-term debt
totaling $188 million and $229 million during the nine and twelve
months ended September 30, 1998, respectively.
As of September 30, 1998, the Company's long-term revolving credit
facilities, which support its commercial paper borrowings, totaled $750
million. The Company is required to pay minimal annual commitment fees
to maintain its credit facilities. Consistent with management's intent
to maintain all or a portion of its commercial paper on a long-term
basis, and as supported by its long-term revolving credit facilities,
the Company included in long-term debt $412 million and $160 million of
commercial paper outstanding as of September 30, 1998 and 1997,
respectively.
The Company's capital structure as of September 30 was as follows:
1998 1997
---- ----
Common Stock Equity 53.26% 53.40%
Long-term Debt, net 45.67% 45.47%
Preferred Stock 1.07% 1.13%
The Company's First Mortgage Bonds are currently rated "A2" by Moody's
Investors Service, "A" by Standard and Poor's and "A+" by Duff and
Phelps. Moody's Investors Service, Standard and Poor's and Duff and
Phelps have rated the Company's commercial paper "P-1", "A-1" and
"D-1", respectively.
OTHER MATTERS
Competition
Wholesale Competition
During the last week of June 1998, some wholesale power markets
experienced sharp increases in prices. That upsurge in power costs was
due, in part, to the unavailability of generating capacity and
unusually hot weather in the Midwestern portion of the country. The
relatively sudden movement in wholesale power prices disrupted certain
power transactions, including some to which the Company was a party.
The monetary damages the Company incurred as a result of those
disrupted transactions did not have a material adverse effect on the
Company's results of operations. The Company is taking steps to
mitigate those monetary damages. The Company anticipates increased
volatility in the wholesale power market during peak demand periods;
however, due to the risk management processes the Company has in place,
the Company does not expect this volatility to have a material adverse
effect on its financial position and results of operations.
North Carolina Activities
The 23-member study commission established to evaluate the future of
electric service in North Carolina met on November 10, 1998. A
consultant's report on the stranded costs that would be associated with
the deregulation of North Carolina's utilities is currently due to the
study commission in December of 1998. The commission will make its
final report to the 1999 Session of the North Carolina General
Assembly. The Company cannot predict the outcome of this matter.
South Carolina Activities
A report issued by the South Carolina Public Service Commission (SCPSC)
on September 30, 1998, estimates that in a deregulated generation
market, South Carolina's three investor-owned electric utilities would
face approximately $1.4 billion in stranded costs in connection with
their South Carolina operations. The report estimates the Company's
potential stranded costs, for its South Carolina operations, would be
approximately $410 million in 2003 dollars. On October 29, 1998, the
South Carolina Senate Judiciary Committee appointed a 13-member task
force to study the deregulation issue and make a report to the South
Carolina General Assembly during the 1999 legislative session. The
Company cannot predict the outcome of these matters.
Federal Activities
At the federal level, additional bills regarding deregulation were
introduced this year, but Congress adjourned in October without taking
any action on the issue. The deregulation debate is expected to
continue in Congress next year. The Company cannot predict the outcome
of this matter.
Company Activities
In 1996, Power Agency notified the Company that it would discontinue
certain contractual purchases of power from the Company effective
September 1, 2001; however, the Company won the right to continue
supplying this power by being selected from a number of bidders. On
September 11, 1998, the Company and Power Agency entered into a revised
agreement that extends the period during which Power Agency will
continue to purchase all of its supplemental power from the Company
through at least December 31, 2002. The new agreement also includes
options for Power Agency to purchase supplemental power from the
Company for the year 2003 and beyond. (The load served by supplemental
power under that agreement will include all of Power Agency's power
needs in excess of the load served by Power Agency through its
ownership interest in generation units that it jointly owns with the
Company and other smaller resources that are currently in place.) The
revised agreement was filed with the Federal Energy Regulatory
Commission (FERC) for approval or acceptance on October 30, 1998. The
Company cannot predict the outcome of this matter.
On October 9, 1998, the Company and its largest customer, NCEMC entered
into an agreement under which NCEMC will purchase a total of 800
megawatts of peaking capacity and associated energy from the Company
during the period from January 1, 2001 through December 31, 2003. The
agreement, which provides NCEMC with an option to extend all or part of
the purchase through 2005, provides capacity to meet NCEMC's growing
peaking power needs. A portion of this purchase is intended to serve
load located in the Company's service area that is currently served by
purchases from the Company under a contract that will expire on
December 31, 2000. During the period 2001 through 2003, this agreement
also will serve up to 450 MWs of NCEMC load that is located in the Duke
Power service area that has not previously been served by the Company.
The agreement will be filed with FERC for approval or acceptance. The
Company cannot predict the outcome of this matter.
On October 30, 1998, the Company and NCEMC also entered into agreements
that supersede the 1993 Power Coordination Agreement between the
Company and NCEMC, as amended (the PCA). The primary effect of the new
agreements is to unbundle the generation and transmission service for
the load previously served under the PCA. To that end, the parties
executed a Network Integration Transmission Service Agreement and a
Network Operating Agreement under which NCEMC will receive transmission
services from the Company pursuant to the Company's Open Access
Transmission Tariff. The parties also entered into a new Power Supply
Agreement, which provides for the Company to sell capacity and energy
to NCEMC under terms and conditions and in amounts that are
substantially the same as those that were set forth in the PCA. The
parties agreed to a modification of the calculation of certain capacity
charges; however, the net effect of the changes is intended to be
essentially revenue neutral under expected load conditions. The Network
Transmission Agreement, the Network Operating Agreement, and the new
Power Supply Agreement were filed with FERC for approval or acceptance
on November 3, 1998. The Company also expects the new Power Supply
Agreement to be submitted by NCEMC to the Rural Utilities Service for
approval. The Company cannot predict the outcome of these matters.
On September 28, 1998, the Company and the South Carolina Public
Service Authority (Santee Cooper) entered into an agreement under which
the Company will provide peaking capacity and associated energy to
Santee Cooper for the period January 1, 1999 through December 31, 2003.
Under the terms of the agreement, the Company will provide 100 MW of
generation capacity in 1999, 150 MW in 2000 and 200 MW from 2001 to
2003. Santee Cooper needs the additional capacity to accommodate its
expected load growth over the next several years. The agreement was
filed with FERC for approval or acceptance on October 23, 1998. The
Company cannot predict the outcome of this matter.
Year 2000
Background
The Company's overall goal is to be Year 2000 ready. "Year 2000 ready"
means that critical systems, devices, applications or business
relationships have been evaluated and are expected to be suitable for
continued use into and beyond the Year 2000, or contingency plans are
in place.
The Company began addressing the Year 2000 issue in 1994 by beginning
to assess its business computer systems, such as general ledger,
payroll, customer billing and inventory control. The majority of these
systems have been corrected and running in the Company's day-to-day
computing environment since 1996. Also, by the mid-1990s, two major
accounting systems were replaced with systems that were designed to be
Year 2000 ready. The Company plans to complete corrections to the
remaining business systems by the end of 1998.
During mid-1997 a Corporate Year 2000 Project was established to
provide leadership and direction to the Year 2000 efforts throughout
the Company and its subsidiaries. Also, the project scope was expanded
to include "embedded' systems (such as process control computers, chart
recorders, data loggers, calibration equipment and chemical analysis
equipment), end-user computing hardware and software (including
personal computers, spreadsheets, word processing and other personal
and workgroup applications), plant and corporate facilities (such as
security systems, elevators and heating and cooling systems) and
business relationships with key suppliers and customers.
The Company is using a multi-step approach in conducting its Year 2000
Project. These steps are: inventory, assessment, remediation and
testing, and contingency planning. The first step, an inventory of all
systems and devices with potential Year 2000 problems, was completed in
January 1998. The next step, completed in the first half of 1998, was
to conduct an initial assessment of the inventory to determine the
state of its Year 2000 readiness. As part of the assessment phase,
remediation strategies were identified and remediation cost estimates
were developed. The Company is utilizing both internal and external
resources to remediate and test for Year 2000 readiness. The Company is
actively conducting formal communications with the suppliers with which
it has active contracts to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year
2000 issue. The Company cannot predict the outcome of other companies'
remediation efforts.
Costs
The Company currently plans to complete the Year 2000 Project by August
1999. The total remaining cost of the Year 2000 Project is estimated at
$13 million. (This estimate excludes Year 2000 Project costs
attributable to recent subsidiary acquisitions, which the Company does
not expect to be material to its financial position and results of
operations.) Approximately $6 million is for new software and hardware
purchases and will be capitalized. The remaining $7 million will be
expensed as incurred over the next two years. To date, the Company has
incurred and expensed approximately $4 million related to the
inventory, assessment and remediation of non-compliant systems,
equipment and applications. The costs of the project and the date on
which the Company plans to complete the Year 2000 modifications are
based on management's best estimates, which were derived using
assumptions of future events including the continued availability of
certain resources, third parties' Year 2000 readiness and other
factors.
Risk Assessment
At this time, the Company believes its most reasonably likely worst
case scenario is that key customers could experience significant
reductions in their power needs due to their own Year 2000 issues.
Although the Company does not believe that this scenario will occur, it
has assessed the effect of such a scenario by using current financial
data. In the event that this scenario does occur, the Company does not
expect that it would have a material adverse effect on the Company's
financial position and results of operations.
The Company believes a more likely scenario is a temporary disruption
of service to its electric customers, including the effect of cascading
disruptions caused by other entities whose electrical systems are
connected to the Company's. The Company has assessed the risk of this
scenario, and believes that its contingency plans would mitigate the
long-term effect of such a scenario. In the event that a temporary
disruption does occur, the Company does not expect that it would have a
material adverse effect on its financial position and results of
operations.
Contingency Plans
Contingency plans will be prepared so that the Company's critical
business processes can be expected to continue to function on January
1, 2000 and beyond. The Company's contingency plans will be structured
to address both remediation of systems and their components and overall
business operating risk. These plans are intended to mitigate both
internal risks as well as potential risks in the supply chain of the
Company's suppliers and customers.
One of the Company's emergency contingency plans specifically addresses
emergency scenarios that may arise due to the fact that electric
utility systems throughout the southeast region of the United States
are interconnected. The Company has been working actively with the
North American Electric Reliability Council and the Southeastern
Electric Reliability Council to address the issue of overall grid
reliability and protection. In order to mitigate the risk of cascading
regional electric failures, the Company can, as a last resort, isolate
its transmission system either automatically or manually. The Company's
emergency readiness contingency plan includes the performance of
regular training exercises that include simulated disaster recovery
scenarios. As part of its Year 2000 contingency planning, the Company
will review its disaster recovery scenarios to identify those that can
be used specifically for Year 2000 readiness training.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", effective for fiscal
years beginning after June 15, 1999. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. It requires the recognition of all
derivative instruments as assets or liabilities in the statement of
financial position and measurement of those instruments at fair value.
The accounting treatment of changes in fair value is dependent upon
whether or not an instrument is designated as a hedge and, if so, the
type of hedge. The Company has not fully analyzed the provisions of
SFAS No. 133.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk exposure has not changed materially from the
exposure as disclosed in the Company's 1997 Annual Report on Form 10-K.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal aspects of certain matters are set forth in Part I, Item 1, Notes
3 and 4 of the Company's financial statements.
Item 2. Changes in Securities and Use of Proceeds
ACQUISITION OF JACK WALTERS, INC. AND JACK WALTERS SERVICE, INC.:
(a) Securities Delivered. Pursuant to a merger agreement and plan
of reorganization effective September 1, 1998, 62,304 shares
of the Company's common stock (Common Shares) that had been
recently purchased in the open market by the Company's
wholly-owned subsidiary, Strategic Resource Solutions Corp., a
North Carolina Enterprise Corporation (SRS), were delivered by
SRS as part of the merger consideration due to the
shareholders of Jack Walters, Inc. and Jack Walters Service,
Inc., both North Carolina corporations, (collectively JWI).
JWI merged into SRS effective September 1, 1998. All Common
Shares delivered by SRS pursuant to the JWI merger agreement
and plan of reorganization were acquired in market
transactions, and do not represent newly-issued shares of the
Company.
(b) Underwriters and Other Purchasers. No underwriters were used
in connection with the transactions identified above. The
shareholders of JWI were the only recipients of the Common
Shares.
(c) Consideration. The consideration for the Common Shares was the
acquisition of all assets and assumption of all liabilities of
JWI by SRS as successor by merger pursuant to the merger
agreement and plan of reorganization.
(d) Exemption from Registration Claimed. The Common Shares
described in this Item were delivered on the basis of an
exemption from registration under Section 4(2) of the
Securities Act of 1933. The Common Shares were received by
four individuals and are subject to restrictions on resale
typical for private placements. Appropriate disclosure was
made to the recipients of the Common Shares.
Item 5. Other Information
Recent Developments
On November 10, 1998, the Company, North Carolina Natural Gas
Corporation, a Delaware corporation (NCNG) and Carolina Acquisition
Corporation, a newly formed Delaware corporation, wholly owned by the
Company (Carolina), entered into an Agreement and Plan of Merger
(Merger Agreement) providing for the strategic business combination of
the Company and NCNG. Pursuant to the Merger Agreement, Carolina will
be merged with and into NCNG (the "Merger") and NCNG will become a
wholly owned subsidiary of the Company. The Merger is intended to
constitute a tax-free reorganization for federal income tax purposes
and to be accounted for as a pooling-of-interests. The joint press
release issued by the Company and NCNG with respect to the Merger is
filed herewith as Exhibit 2(a).
In accordance with the Merger Agreement, each share of NCNG Common
Stock, par value $2.50, issued and outstanding immediately prior to the
effective time of the Merger, including the rights attached thereto
issued pursuant to the Rights Agreement dated October 7, 1997, between
NCNG and Wachovia Bank, N.A., will be converted into the right to
receive shares of the Company's Common Stock, without par value, equal
to the Exchange Ratio. The Exchange Ratio will be determined by
dividing $35 by the average closing price of a share of the Company's
Common Stock for each of the twenty consecutive trading days prior to
and including the fifth trading day prior to the closing of the Merger.
The Exchange Ratio will not exceed 0.8594 nor be less than 0.7032. The
Merger Agreement provides that if the Merger closes after November 10,
1999, the Exchange Ratio will be subject to further adjustment. The
Company will issue approximately $354 million in stock to NCNG
shareholders to complete the Merger.
The Merger Agreement has been approved by the Boards of Directors of
the Company and NCNG. Consummation of the Merger is subject to certain
closing conditions, including approval by the shareholders of NCNG.
NCNG presently intends that the shareholders meeting to consider such
approval will be held as early as practicable. Consummation of the
Merger is also subject to (i) receipt by the Company and NCNG of a
favorable opinion of counsel that the Merger will constitute a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended, (ii) the receipt by the Company and NCNG of favorable
letters from their independent auditors that the Merger will qualify
for pooling-of-interests accounting treatment, (iii) the effectiveness
of a Registration Statement to be filed with the Securities Exchange
Commission by the Company with respect to its Common Stock to be issued
in the Merger, (iv) certain regulatory approvals or filings, including
approvals by or filings with the NCUC and the SCPSC, and the filing of
the requisite notifications with the Federal Trade Commission and the
Department of Justice under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the expiration of applicable
waiting periods thereunder, and (v) other customary conditions to
closing.
The Merger Agreement provides for termination by either the Company or
NCNG if the Merger has not been consummated by December 31, 1999 or if
the necessary shareholder approval is not obtained by NCNG at its
special shareholders' meeting. The Merger Agreement may be terminated
by NCNG if prior to the effective time a third party has made a bona
----
fide proposal which the Board of Directors of NCNG determines is a
----
Superior Proposal (as defined in the Merger Agreement) and the Company
does not make, within five business days of receiving notice of the
Superior Proposal, an offer that the Board of Directors of NCNG
believes is at least as favorable, from a financial point of view, to
NCNG's shareholders as the Superior Proposal. The Merger Agreement may
also be terminated by the Company if the Board of Directors of NCNG
fails to recommend to the NCNG shareholders (or withdraws its
recommendation of) approval of the transactions contemplated by the
Merger Agreement.
If the Company terminates the Merger Agreement because (i) the
effective time does not occur by December 31, 1999 as a consequence of
NCNG's failure to fulfill certain obligations under the Merger
Agreement, or because NCNG or its shareholders has received an
Alternative Proposal (as defined in the Merger Agreement) or (ii) the
Board of Directors of NCNG fails to recommend to NCNG's shareholders
(or withdraws its recommendation of) approval of the transactions
contemplated by the Merger Agreement; or if NCNG terminates due to its
acceptance of a Superior Proposal; or if either party terminates due to
the failure of NCNG's shareholders to approve the Merger and prior to
or during the special meeting of shareholders an Alternative Proposal
has been made and not revoked, then NCNG must pay the Company a
termination fee of $10 million; provided, however, that no payment will
be due where the Company terminates in connection with NCNG's receipt
of an Alternative Proposal unless within 12 months of termination NCNG,
or any of its subsidiaries, enters into a definitive agreement relating
to such Alternative Proposal, or a similar proposal.
The description of the Merger Agreement set forth herein does not
purport to be complete and is qualified in its entirety by the
provisions of the Merger Agreement, which is attached hereto as Exhibit
2(b) and incorporated herein by reference.
Deadline for Shareholder Proposals
The deadline by which the Company must receive notice of shareholder
proposals which are to be presented at its 1999 Annual Meeting of
Shareholders, but not included in its 1999 proxy materials is February
12, 1999. The Company's management proxies will be allowed to use their
discretionary voting authority in connection with proposals for which
this deadline is not met.
Item 6. Exhibits and Reports on Form 8-K
(a) See EXHIBIT INDEX
(b) Reports on Form 8-K filed during or with respect to the
quarter:
NONE
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CAROLINA POWER & LIGHT COMPANY
(Registrant)
By /s/ Glenn E. Harder
-------------------
Glenn E. Harder
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By /s/ Bonnie V. Hancock
----------------------
Bonnie V. Hancock
Vice President and Controller
(Chief Accounting Officer)
Date: November 13, 1998
EXHIBIT INDEX
Exhibit Number Description
2(a) Press Release of Carolina Power & Light Company,
dated November 11, 1998.
2(b) Agreement and Plan of Merger By and Among
Carolina Power & Light Company, North Carolina
Natural Gas Corporation and Carolina Acquisition
Corporation, dated as of November 10, 1998.
4 Form of Carolina Power & Light Company First
Mortgage Bond, 6.80% Series Due August 15, 2007.
27 Financial Data Schedule